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Friday, January 18, 2008

he dollar’s recent rebound against the euro and sterling was undermined by weak economic data. The reports released earlier today added to burgeoning fears that the US economy is headed toward a recession. A combination of poor housing data and a disappointing Philadelphia Fed survey set the tone for the trading session, with the greenback initially weaker across the board. The reports also fueled expectations for aggressive policy easing from the Fed beyond the largely priced-in 50-bp rate cut anticipated at the end of the month.

Housing starts for December plunged by over 14% to 1.006 million units, its lowest level in 16-years. Consensus estimates were calling for a drop to 1.14 million units versus 1.187 million units from the previous month. December housing permits declined by 8.1% to 1.068 million units, versus a 0.7% drop in November at 1.162 million units. On a positive note, weekly jobless claims declined to 301k from 322k.

The January Philadelphia Fed survey revealed dismal economic conditions, falling to its lowest level in six-years to -20.9, far greater than expectations for a decline to -1.0 from -1.6 from December. The employment index dipped into negative territory in January to -1.5 from 3.8 in December, its lowest level since September 2003. The new orders component fell to -15.2 in January, a sharp reversal from the 12 reading in December.

Fed Chairman Bernanke delivered his Congressional testimony today, offering a somber assessment on the outlook for the US economy. He said the economic outlook has worsened and that downside risks to growth are more pronounced. Bernanke reiterated last week’s comments that “more policy easing may be necessary and was ready to take substantive action”. He said that inflation expectations remained well anchored so far and funding markets were still impaired. Further, he said inflation expectations were well anchored so far adding that pressures on resource use have eased.

Atlanta Fed President Lockhart echoed a similar sentiment, saying additional rate cuts may be needed in the face of economic weakness. He said recent economic news has been more negative than expected and as a result, the Fed must act pragmatically. Lockhart sees inflation moderating, permitting the Fed to focus on immediate risks to growth. He expects adjustment under way in the US housing market and anticipates correction for most of 2008.